Comparison of Explanatory Power of Carhart Four-Factor Model and Fama-French Five-Factor Model in Prediction of Expected Stock Returns

Subject Areas : Financial engineering

Hashem Hezbi ¹ , Allahkaram Salehi ²

1 - گروه حسابداری، دانشجوی کارشناسی ارشد ,واحد علوم تحقیقات خوزستان،دانشگاه آزاد اسلامی اهواز‌، ایران.
2 - استادیار گروه حسابداری، دانشگاه آزاد اسلامی واحد مسجدسلیمان، مسجدسلیمان، ایران.

Received: 2016-02-24 Accepted : 2016-04-26 Published : 2016-09-22

Keywords: Share return, Fama-French three-factor model, Carhart four-factor model,

Abstract :

This study aims to compare explanatory power of Carhart four-factor model and Fama-French five-factor model in prediction of expected stock return in listed firms of Tehran Stock Exchange. To do this, a sample of 142 firms was selected from 2009 to 2013. In this study, hypotheses from multiple regression approach were evaluated using panel data method. Results show that Fama-French five-factor model has more explanatory power than Carhart four-factor model in predicting firms' stock returns. Also, results indicate that adding two factors, profitability and investment, to three-factor model increases the model power in explanation of stock returns of firms.